Banks need more than recapitalization: Expert

JAKARTA (JP): The government-sponsored bank recapitalization program will do little to right the country's ailing banking sector if no measures are imposed to force the banks to operate more professionally, a noted German banking expert said on Monday.

Chief economist of Germany's Deutsche Bank Group Norbert Walter said here that owners and the management of the country's banks should come from a circle of people who were consummately knowledgeable about the banking sector to ensure professionalism.

"Only people that have demonstrated skills are allowed in the banking industry," he said in his presentation on the Indonesian banking sector.

Walter believed the unprofessionalism of bank officials led to investment of Indonesian banks' funds in unsound and inappropriate projects.

Most domestic savings were consequently used to finance unproductive sectors while overlooking economic yields for the country, he said.

"Only recapitalizing the banks, and not changing them, is not enough."

He acknowledged that the bank recapitalization program, as part of the effort to restructure the financial institutions of the country, was an important component in effecting economic recovery.

But the program would be likely to fail if there was no change in the banking culture and professionalism, he warned.

Failure would necessitate another round of recapitalization, with taxpayers again left to shoulder the costs, he said.

The government plans to issue bonds to raise about Rp 550 trillion to recapitalize and restructure at least 80 of the country's banks in the recapitalization program.

The banking sector was crippled by the economic crisis, causing negative interest spreads, runs on several institutions and high levels of bad debt. Most of the country's more than 200 banks have negative capital levels and are struggling under mountains of nonperforming loans.

The government said in December it would recapitalize the banking system by assisting banks with capital-adequacy ratios of between under 4 percent and minus 25 percent. The government will provide 80 percent of the funds needed to raise the banks' capital levels to 4 percent, the minimum level required by the central bank. The remaining 20 percent has to be provided by the shareholders.

Walter advised Indonesian banks to gradually increase their 4 percent CAR level to enable them to face a possible downturn in their business.

"Rock solid equity participation (by shareholders) is needed for the banking industry in any country," he said.

Walter said that the government should also allow the establishment of a limited deposit insurance scheme in a bid to protect bank clients and preclude massive runs on institutions.

The government introduced a blanket guarantee for bank deposits early in 1998 following a massive bank run at the end of 1997. (udi)